Commodity Price Volatility and World Market Integration since 1700
Poor countries are more volatile than rich countries, and we know this volatility impedes their growth. We also know that commodity price volatility is a key source of those shocks. This paper explores commodity and manufactures price over the past three centuries to answer three questions: Has commodity price volatility increased over time? The answer is no: there is little evidence of trend since 1700. Have commodities always shown greater price volatility than manufactures? The answer is yes. Higher commodity price volatility is not the modern product of asymmetric industrial organizations - oligopolistic manufacturing versus competitive commodity markets - that only appeared with the industrial revolution. It was a fact of life deep into the 18th century. Does world market integration breed more or less commodity price volatility? The answer is less. Three centuries of history shows unambiguously that economic isolation caused by war or autarkic policy has been associated with much greater commodity price volatility, while world market integration associated with peace and pro-global policy has been associated with less commodity price volatility. Given specialization and comparative advantage, globalization has been good for growth in poor countries at least by diminishing price volatility. But comparative advantage has never been constant. Globalization increased poor country specialization in commodities when the world went open after the early 19th century; but it did not do so after the 1970s as the Third World shifted to labor-intensive manufactures. Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus conditional on the century.
We acknowledge with thanks help rendered by Sambit Bhattacharyya, Chris Blattman, George Boyer, Luis Catão, Bob Gregory, Jason Hwang, Norman Loayza, Alan Matthews and Steve Poelhekke, although they are not responsible for any flaws that may remain. Much of the work on this paper took place while O'Rourke was a Government of Ireland Senior Research Fellow, and he thanks the Irish Research Council for the Humanities and Social Sciences for their generous support. Williamson does the same for the Harvard Faculty of Arts and Science. Jacks gratefully acknowledges the Social Sciences and Humanities Research Council of Canada for research support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
David S. Jacks & Kevin H. O'Rourke & Jeffrey G. Williamson, 2011. "Commodity Price Volatility and World Market Integration since 1700," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 800-813, 01. citation courtesy of